Gillard buys health peace for $107m

The federal government has been forced to reverse a decision to cut $107 million from Victorian hospitals amid growing concerns about an electoral backlash from Prime Minister Julia Gillard's home state.

The Commonwealth had come under pressure after using a recalculation of Victoria's population estimate to justify the cuts, worth $107 million this financial year and $475 million over four years.

But in a surprise about-face, Health Minister Tanya Plibersek will announce on Thursday the Commonwealth will not impose the $107 million cut, which was inflicted midway through the current financial year, after hospitals finalised their budgets.

In a swipe at the Baillieu government, the money will be immediately paid directly to hospital administrators, rather than into state coffers.

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Ms Plibersek said Ted Baillieu's government had shown it could not be trusted to manage its health and hospital budget.

''The cash injection will be paid directly to Local Hospital Networks, which will distribute the money to ailing Victorian hospitals, and will not pass through the hands of the Baillieu government, which has proven itself to be a cruel and incompetent manager of the Victorian health system,'' Ms Plibersek said.

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"We believe we have an obligation to ensure Victorians are given the best possible healthcare.

''We will not stand by and allow Premier Baillieu's politicking to hurt patients. For two years Premier Baillieu's blatant disregard for the welfare of Victorian patients has seen beds close, elective surgery waiting lists blow out and standards of care decline.''

The decision to pay the money directly to hospitals is symptomatic of a rapidly worsening relationship between the state government and the Gillard government. Ms Plibersek has accused the state government of using the cuts as a smokescreen to mask more than $600 million in state cuts.

Ms Gillard on Wednesday used a letter to accuse Mr Baillieu of running a ''disingenuous and purely political campaign'' to mask his own inaction, pointing out that federal funding for Victorian hospitals would increase from $3.6 billion in 2012-13 to $4.5 billion in 2015-16.

''Your campaign has been designed to detract from the decisions you and your government have made,'' Ms Gillard writes.

The Gillard government will partly offset the cost to the federal budget by withdrawing $55 million previously earmarked to reward Victoria for productivity boosting measures.

The hospital funding stoush has been growing since late last year. Unlike other states, which absorbed the loss of funding into their own budgets, the Baillieu government ordered hospitals to wear the changes, resulting in cuts to elective surgery and bed closures.

Health Minister David Davis welcomed the move, but said the federal government should now follow up and restore the full amount of $475 million.

''The serious damage has been done to the Victorian health system,'' he said. ''It will take time to recover from this punishing act.''

Federal opposition health spokesman Peter Dutton said the funding reversal was an act of a government in turmoil.

''To announce funding then to cut it and cause hospitals to close beds and sack doctors, and then to reinstate this funding is one of the greatest acts of incompetence of the Gillard government,'' he said.

Up until now the federal government has remained adamant it would not back down over the health cuts.